Lamfalussy was right: independence and interdependence in a monetary union

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February 2nd, 2015

Speech by Benoit Coeure here.

IMF Staff Reports

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January 29th, 2015

Released by the IMF:

There is lots of detail in both reports but it is likely most attention will focus on paragraphs 48-52 of the ex-post evaluation (though it’s all pretty much been said before).

Household Finance and Consumption Survey 2013

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January 29th, 2015

Report from the CSO here with this press release.  This is a valuable piece of information that fills an important gap.

IEA 2015 – Submission Deadline Approaching Fast!

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January 27th, 2015

The 29th Annual Irish Economic Association Conference will be held at the Institute of Banking, IFSC, 1 North Wall Quay, Dublin 1 on Thursday May 7th and Friday May 8th, 2015. Edgar Morgenroth (Economic and Social Research Institute) is the local organizer.

The ESR guest lecture will be given by Professor Christopher Udry (Yale University) and the Edgeworth Lecture by Professor Giancarlo Corsetti (University of Cambridge).

The Association invites submissions of papers to be considered for the conference programme. Papers may be on any area in Economics, Finance and Econometrics.
The deadline for submitted articles is the 8th of February 2015 and submissions can be made through this site.

Please note that the Irish Economic Association awards two prizes for conference papers, the Denis Conniffe prize and the Novartis prize.

The Denis Conniffe prize of €500 is awarded for the best paper by a young author-presenter at the Irish Economic Association annual conference. To be eligible the author must be either (a) aged < 30 or (b) within 3 years of finishing a PhD. For co-authored papers, all co-authors must meet these criteria. If you are eligible for this award and would like to be considered for the prize, please let the conference organiser know, when submitting your paper. The prize award will be decided by the IEA council and will be announced at the annual conference.

The Novartis prize of €500, is sponsored by Novartis Ireland, is awarded to the best Health Economics paper presented at the Irish Economic Association annual conference. If you consider your paper to be in the “health economics” field and would like to be considered for the prize, please let the conference organiser know, when submitting your paper. Members of the IEA council or individuals affiliated to Novartis are not eligible for the prize. The prize award will be decided by the IEA council and will be announced at the annual conference.

Yanis Varoufakis

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January 27th, 2015

Yanis Varoufakis will be confirmed as the new Greek finance minister later today.  He “is no extremist.” [EDIT: The Guardian think “radical”.]

Here is a recent interview with him and ‘A modest proposal for resolving the eurozone crisis’ is here.  Back in September a document on ‘What the Syriza government will do’ was published.

A moment of truth for the European project

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January 26th, 2015

I thought that an appropriate way to celebrate Syriza’s victory was to do what I should have done a long time ago, and finally read Peter Mair’s Ruling the Void on the journey from Dublin to Oxford this morning. It’s a terrifically insightful (and readable, and short) book that had me nodding in agreement throughout, and you could base a whole series of blog posts on it. So let me just pick up, on the day that is in it, on one of the very last points made in the book:

…we are afforded a right to participate at the European level…and we are afforded the right to be represented in Europe, even if it is sometimes difficult to work out when and how this representative link functions; but we are not afforded the right to organise opposition within the European polity. There is no government-opposition nexus at this level.  We know that a failure to allow for opposition within the polity is likely to lead either (a) to the elimination of meaningful opposition, and to more or less total submission, or (b) to the mobilisation of an opposition of principle against the polity — to anti-European opposition and to Euroscepticism

Democratic political systems need oppositions which can force policy reversals if voters decide that that is what they want. Kicking the bums out is not enough, we have to be able to kick out their policies as well.

Syriza is opposed to European macroeconomic policy, and won the elections on that basis. They speak for lots of Eurozone voters, not just Greek ones. If the EU have any sense they will not play hardball with the new Greek government, especially since just about everyone agrees that Greece’s debt is unsustainable. Nor should anyone be hoping that the new Greek government will be “pragmatic”, and forget its opposition pledges once in government. The Greeks want fundamental change, and have voted for a democratic pro-European party to express that desire — which, you might think, is a lot more than the Troika deserves. If Syriza doesn’t deliver, for fear of upsetting its Eurozone partners, voters may turn to parties that really are anti-European. In the Greek context, that could be very ugly indeed.

How the EU responds to last night’s election will tell us a lot about the actually existing European project.

Opening Statement to Oireachtas Banking Inquiry

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January 21st, 2015

My opening statement is here.

The background papers are:

Irish Banking Review 1997

Irish Banking Review 1998

Journal of Economic Perspectives 2006

Irish Crisis Paper 2010

NESC Background Paper 2010

Journal of Economic Perspectives 2012

 

 

Quote of the day

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January 20th, 2015

 “One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.” 

(Angela Merkel, according to the FT.)

It is very good to see this sentiment being openly expressed by the German leader, since it is what we believe the German government thinks, and confirmation is useful. But, really, it is intolerable. Where in the treaties does it say that Eurozone monetary policy should be run in a sub-optimal and deflationary manner, thus increasing unemployment, putting the public finances under pressure and worsening economic distress more generally, so as to force other peoples’ governments to do things that the Germans think are good for them, but that have nothing to do with monetary policy?

No democrat should accept a Eurozone run along those lines.

For Risk Measurement Nerds Only: The Swiss Franc Shock was a 200-sigma event

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January 20th, 2015

On January 15th, the one-day return to holding Swiss Francs from a Euro perspective was 16.9%. This is a high one-day return for any currency pair, but appears cataclysmic given the extremely low return volatility of the Swiss Franc from a Euro perspective in recent months. This one-day jump was a “239-sigma event” meaning that the magnitude of this return was 239 times the recent return volatility (using a 90-day historical estimate of volatility). In fact, in the period just before the sudden jump, the sample volatility of this exchange rate was even lower. Using a shorter 20-day volatility estimate, the sudden jump was a 400-sigma event.

It is interesting how closely the time-series behaviour of this exchange rate matches the predictions of Krugman’s 1991 model of a government-implemented exchange rate limit, in which traders credibly believe that the authorities will prevent the exchange rate from piercing the exchange rate limit. As the fundamentals for the exchange rate made the Swiss Franc greatly undervalued, the traded exchange rate settled down just near the government-imposed limit, with very low volatility. And then suddenly the credible promise became a non-promise.

Chalk one up for Krugman, in terms of the elegant fit between his theoretical model and this recent market experience. Several forex trading firms went bust, but they should have had better risk management systems.

John Van Reenen: Solving the Growth Puzzle

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January 20th, 2015

Slides, audio and video from this talk at IIEA yesterday - here.

Central Bank of Ireland Conference: Balance Sheet Recovery of Households and Firms

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January 20th, 2015

Friday January 30th.  Details here.

Chetty on Behavioural Economics and Policy

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January 19th, 2015

From the recent AEA conference, Raj Chetty’s lecture on behavioural economics and public policy is one of the most useful summaries to date (summary here).

Ireland—Lessons from Its Recovery from the Bank-Sovereign Loop

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January 19th, 2015

Papers by Schoenmaker, Fatas and Eichengreen now online at conference page here.

Reminder: live webfeed available during the event.

 

 

Irish Unemployment

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January 18th, 2015

I was asked to provide links and suggestions in terms of policies to respond to unemployment in Ireland. The broad fiscal and monetary causes of unemployment are discussed in many other places and it is clear that a combination of a property bubble, banking collapse and policies that have kept aggregate demand too low are all contributing factors. In considering unemployment, it is clear that more than just the short run shock to income and consumption should be considered. There  is substantial evidence that unemployment has substantial negative psychological effects that are scarring over life and also potentially self-perpetuating. Therefore it should get greater weighting in policy contexts than for models that just examine narrow financial variables. Below are some ideas on potential policy development.

(i) Bell and Blanchflower have written several papers on responding to unemployment in particular to youth unemployment. In one of the most directly relevant to policy, they list 10 potential policies for the UK environment. These are listed below. It is clear that some of these are more feasible than others in the Irish context. For example, people might find a raising of the school leaving age infeasible but a proxy policy such as the introduction of an Education Maintenance allowance is surely worth debating. Similarly, people may not think a fiscal stimulus (at least at Irish-specific level) is feasible but that does not negate the potential for examining the employment consequences of existing current and in particular capital spending. Also some of the policies below have been features of the Irish environment in various ways including increasing the number of back-to-education places.

a. The government should undertake a substantial fiscal stimulus focused on jobs, as soon as possible

b. Provide large cuts in income taxes and National Insurance Contributions aimed at the low paid and the young. For the unemployed, mortgage interest payments could also be paid by the government in the form of a loan, with the proviso that it would have to be paid back eventually.

c. Increase the education leaving age to eighteen starting in June 1st 2009 or as soon thereafter as is feasible.

d. Provide further encouragement for those in the age range 18-24 to undertake further/higher education by increasing the number of places available

e. Provide further encouragement for those in the age range 18-24 to undertake further/higher education by providing financial inducements for them to do so

f. Expand the numbers of teacher training places as soon as possible with an emphasis on training in further education

g. Do direct job creation through increased investment in the infrastructure with particular emphasis on ‘shovel ready’ projects that could start quickly.

h. Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

i. Temporary, limited and targeted expansion of ALMPs

j. Provide incentives to encourage the use of short-time working and job sharing as alternatives to redundancy and unemployment. These might take the form of time limited tax incentives

(ii) See the session from the 2012 Irish economy conference last year for a range of coherent ideas. The session on early childhood development is also very useful.

(iii) The role of better designed welfare and activation policies drawing from developments in the economics of evaluation is something that should be discussed further. Very few if any of the current government employment programmes have been or can be evaluated formally due to the way they are rolled out. For example, the evaluation of Jobbridge does not contain a sufficiently well-constructed control group to allow us to know what would have happened had Jobbridge not been rolled out. This is a problem across most areas of government intervention in the labour market and it hampers the ability to learn from programmes that are rolled out. The best way to achieve this would be to have someone who knows how to construct a causal evaluation assist in the process of writing the tenders for these evaluations, something that does not appear to happen at present.

(iv) I have posted here on a number of occasions about the potential role of understanding psychology in designing welfare policies and job activation. Many activation policies are based on models of human behaviour that are not grounded in empirical evidence. Denise Hawkes from UCL Institute of Education and others have been conducting very interesting behavioural trials in UK job centres (see recent Stirling conference for summary). This is early stage work but is an obvious direction for figuring out how to make government supports for people who are unemployment more effective and supportive. The redevelopment of FAS/SOLAS and the design of communication about welfare policies, education incentives and so on should integrate this literature.

(v) The key missing aspect from traditional models of job activation is the mental health effect of job loss. I have posted on this here recently  and here. The work of Professor Richard Layard in promoting development of policy around unemployment and mental health has been one of the key breakthroughs in this area over the last decade. From what I can see it has gotten not very much attention in Ireland and it would be worth debating this here a lot more with a view to assessing whether some of the ideas should be implemented.

(vi) More generally, a lot of knowledge gaps exist including basic profiles of the unemployed in Ireland such as their processes of job search. While basic profiling has been taking place, there is not a well-developed model of job search such as could be constructed from the DWP job search study. We also know very little about interlinkages between debt, housing and unemployment though the central bank research is improving the situation in this regard. In general, the data available to study job search in Ireland could be improved substantially with more engagement between policy and academics.

The Funding of the Irish Domestic Banking System During the Boom

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January 16th, 2015

The revised version of the paper I presented at SSISI is here.

Cross-Country Exposures to the Swiss Franc

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January 16th, 2015

Jointly with Agustin Benetrix, I wrote a paper on this topic for a SNB conference in November:  it is here.

TCD Seminar, January 23: Resolving Residential Mortgage Distress: Time to Modify?

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January 15th, 2015

 IIIS Seminar Room,  Level 6, TCD Arts Block

9am-10am,  Friday January 23

Resolving Residential Mortgage Distress: Time to Modify? 

Jochen R. Andritzky (IMF)

 

  

Summary: In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and declining consumption and incomes, leading to higher mortgage defaults and deeper recessions. In such situations, resolution policies may need to be adapted to help contain negative feedback loops while minimizing overall loan losses and moral hazard. Drawing on recent experiences from Iceland, Ireland, Spain, and the United States, this paper discusses how economic trade-offs affecting mortgage resolution differ in crises. Depending on country circumstances, the economic benefits of temporary forbearance and loan modifications for struggling households could outweigh their costs. 

Introductory statement by Governor Patrick Honohan at Oireachtas Banking Inquiry

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January 15th, 2015

here.

Event Reminders

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January 14th, 2015

My SSISI talk
“The Funding of the Irish Domestic Banking System During the Boom”
-   tomorrow night at 6pm at RIA. More details here.

Eichengreen on his new book “Hall of Mirrors”  – Tuesday the 20th at 9am (Ed Burke Theatre, TCD).  More details here.

 

Ireland—Lessons from Its Recovery from the Bank-Sovereign Loop

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January 14th, 2015

There will be a conference on this topic next Monday, co-organised by CEPR, Central Bank of Ireland and IMF.

More details about the conference available here.  There will be a live webcast link on the day.

Central Bank Economic Letter: Interpreting data for Ireland in international banking statistics

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January 14th, 2015

here.

 

Abstract:

 

 

This Letter provides an overview of Irish international banking statistics, which detail the international financial linkages of Irish banks. The complexity of the Irish banking system, in particular the role of the IFSC, poses challenges in interpreting these data. In order to illustrate some of the issues involved, this Letter reviews the main conceptual and methodological frameworks underlying Irish international banking statistics, and highlights some of the possible pitfalls which arise when trying to interpret the data.

 

ECJ Decision

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January 14th, 2015

Potentially far reaching impact of this ECJ decision, coupled with details of the SGP changes in the ‘interpretive communication’ document Seamus blogged about yesterday. QE here we come?

 

 

Research Assistant Post

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January 14th, 2015

I’m hiring a Research Assistant in Economics. This is a 12 month post, closing date for applications is January 31st, and the details of the job, as well as details on how to apply, are here.

SGP Revised – again

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January 13th, 2015

The latest playbook for the Stability and Growth Pact has been published by the European Commission.  Here is a link to the document along with two related press releases.

We now have this little matrix:

The Commission’s methodology puts Ireland’s output gap at close to zero so we are in “Normal times".  With public debt above 60 per cent of GDP this means that an improvement of greater than 0.5 per cent of GDP in the structural balance is required.

The numbers released with October’s budget would suggest that Ireland is on schedule to achieve this.

This shows an average annual improvement in the structural balance out to 2018 of just over 1.0 per cent of GDP. But these numbers come with a massive health warning.  The projections in the outlook are set in terms of the following qualification:

As there are still uncertainties with regard to the interpretation and implementation of the fiscal rules, there is a technical assumption that voted expenditure ceilings remain fixed at 2015 levels. Similarly, taxation measures for the outer years are not embedded in the budgetary numbers at this stage.  Priorities, which have been outlined in the Budget and Expenditure Report, will be addressed in subsequent Budgets when there is technical clarity around the quantum of fiscal space.

So no provision has been made for the promised tax cuts and expenditure increases that are being wheeled out on a regular basis.

The Commission document has lots of stuff on how they intend to account for the unknown impact of future reform measures on the unknowable structural balance. If there are going to be new caveats and qualifications every time a country is close to breaching the rules there is a risk that the SGP might become complicated!

From Ireland’s perspective it must be realised that while rules can be good they can never be perfect and there appears to be a risk that our fiscal policy becomes fixated on doing just enough to satisfy the SGP rules.  There are frequent references to the amount of “fiscal space” that is available.  This will be set relative to the Expenditure Benchmark which is likely to get increased attention when we become subject to it in 2016 upon leaving the EDP.

However, with a continuing deficit and a debt north of 100 per cent of GDP there is close to no fiscal space.  In the run-up to the crisis Ireland’s budgets satisfied the rules that were in place at the time. We reached and then stayed at the MTO of a balanced budget but that was no protection against the budgetary collapse that occurred. 

The updated rules might be better but there is no evidence that they are a panacea. If they were they wouldn’t need constant updating.

Revenue Statistics webpage

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January 12th, 2015

See new site here.

The page contains statistical information on taxes and duties for which the Office of the Revenue Commissioners is responsible, as well as further outputs linked to Revenue’s activities and links to tax related information sources on other websites. Information is presented under a number of categories:
· Tax Receipts
· Ready Reckoners
· Registrations, Assessment and Transactions
· Income Tax and Corporation Tax
· Vehicle Registration Tax
· Incidence of Excise and VAT on Oils, Alcohol and Tobacco
· Cross Border Price Surveys
· Local Property Tax Compliance Stats

Strategy for dealing with banks is working

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January 12th, 2015

Article in The Irish Times by Minister for Finance Michael Noonan is here.

It is being reported on elsewhere:

All of these seem an exaggeration of what was actually in the article and the use of single quotation marks by the Irish Independent suggests their headline is something Michael Noonan actually said. 

The piece from the Minister concludes:

I am confident that, over time, we will at a minimum fully recover the funds this Government invested in AIB, Bank of Ireland and Permanent TSB. If economic and trading conditions continue to improve over the next decade or so, the cash returned to the State combined with the value of any remaining shareholding may exceed the funds invested.

The confidence is about the recovery of the money put in by “this Government”.  That was the €19 billion put in after the 2011 PCAR exercise of which around €2.3 billion has been returned from the sale of Irish Life and the BOI contingent capital notes.  There is €17 billion to go.  The article does not say that all the money pumped into the remaining banks will be returned though is something that “may” happen. 

Part of this reported is likely the result of the byline used by The Irish Times which states that:

At the very least, the State should recover all of the money it has invested so far

It appears the sub-editor didn’t take in the actual text either. 

And, of course, there is no discussion in either the original piece or the reports of it that money received in the future after “the next decade” will have a different real value to the money used from 2009-2011 to recapitalise the banks, not to mention interest and opportunity costs. 

It is a positive that we are now considering some of the bank legacy issues as assets rather than liabilities. But the possibility of recouping money from selling stakes in the banks is not new and just as there was lots of exaggeration on the way down it now looks like we’ll get plenty of it on the way up. 

The Guarantee

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January 8th, 2015

The film will be aired tonight at 9pm.  The film is good and well worth watching for those who missed its cinema run before Christmas. 

It must though be considered in the light of being a drama and not a documentary.  Unsurprisingly it differs somewhat from the stage version, Guaranteed!, with additional characters and less emphasis on a number of the alternatives that may have been considered. 

Obviously some of the characters and most of the dialogue is fictional and we can’t be sure that the stance of individual characters is accurate, particularly in the Cowen-Lenihan exchanges.  Overall it is a good dramatisation and will probably be more accurate than the debate which is due to following the airing.

I am looking forward to The Bailout later this year.

IMF Multi-Country Report: Housing Recoveries: Cluster Report on Denmark, Ireland, Kingdom of the Netherlands—the Netherlands, and Spain

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January 8th, 2015

here.

The ECB’s Policy Target

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January 7th, 2015

The only centralised macroeconomic policy target in the Eurozone is the ECB’s 2% inflation number. Today’s flash estimate from Eurostat shows a price decline of 0.2% over twelve months. The index for the Eurozone has in fact been flat now for eighteen months – today’s number of 117.70 compares to 117.61 in June 2013.

The undershoot would be a concern in a proper monetary union operating at the ZLB: real rates are too high. In the Eurozone, which is not a proper monetary union, just a common currency area with heavily indebted states, it creates two additional problems.

The real burden of debt is not eroding at the advertised rate. If the ECB had delivered a 2% rate since December 2008, at which point debt build-up in the periphery was already manifest, the index today would be 121.6 rather than 117.7. If the ECB fails to get the rate of inflation up to 2% for another couple of years as QE-pessimists fear, the failure to hit the inflation target could add 5% or 6% to real debt burdens of sovereigns which have already had to resort to official lenders.

The second problem is the absence of any other centralised macro policy instrument, if you discount, as you should, Jean Claude Juncker’s leverage wheeze. The instrument that has fallen short is the only one available.

The inflation target should now be Olivier Blanchard’s 4% rather than the ECB’s 2%, if only to make up lost ground. If you believe that the ECB cannot or will not deliver on the inflation rate, the alternative is illegal: a fiscal expansion financed by the central bank, the kind of thing they do in real monetary unions.

TCD Policy Institute Event: Barry Eichengreen, “Hall of Mirrors”

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January 6th, 2015

Barry Eichengreen will talk about this new book in the Ed Burke Theatre (TCD Arts Block), 9am-10am on Tuesday January 20th.  All welcome!

 

  • First and only systematic comparative analysis of the two great economic and financial crises of the last 100 years
  • Provides an integrated account of experience in the US and Europe, which together constituted the epicenter of the recent crisis and were similarly at the center of the Great Depression
  • Economic analysis is leavened by anecdote and personalities, with key figures in both crises introduced and humanized
  • Shows how the history of the Great Depression shaped how policy makers perceived and responded to the Global Credit Crisis, but equally how the recent crisis will in turn re-shape how we see the Depression